Federal Reserve Bank of Chicago

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During the recent financial crisis, the Federal Reserve implemented a series of extraordinary and unconventional policies to alleviate the impact of the crisis on financial markets and the economy. In this paper, the authors examine the effects of these policies on broad financial market conditions, explicitly taking into account that...

The financial labor supply accelerator links hours worked to minimum down payments for durable goods purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household...

The recent run-ups in oil and other commodity prices and their implications for inflation and monetary policy have grabbed the attention of many commentators in the media. Clearly, higher prices of food and energy end up in the broadest measures of consumer price inflation, such as the Consumer Price Index....

The authors' study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, they employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, they find that...

Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans (interest only, negative amortization and teaser mortgages) enable households to postpone loan repayment compared to traditional mortgages and hence relax borrowing constraints. At the...

The 2010 Summer Workshop on Money, Banking, Payments and Finance met at the Federal Reserve Bank of Chicago this summer, for the second year. The following document summarizes and ties together the papers presented. The annual Summer Workshop on Money, Banking, Payments and Finance met again in August 2010. The...

The authors analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example refers to consumers who transfer the entire balance from an existing credit card account to a new account, but use the new card for convenience transactions,...

The growth of securitization made it easier for banks to sell home mortgage loans that they originated. The author explores how mortgage sales affected banks in the years leading up to the financial crisis that began in 2007 and how their pre-crisis mortgage sales affected banks during the crisis. Loan...

This chapter discusses identification of common selection models of the labor market. The authors start with the classic Roy model and show how it can be identified with exclusion restrictions. The authors then extend the argument to the generalized Roy model, treatment effect models, duration models, search models, and dynamic...

Congress has recently passed a financial reform bill. Many of the components of that bill center on the issues discussed in this paper. Importantly, the legislation leaves many of the details to be worked out by the regulatory authorities. One of the key components of an orderly resolution process is...

The participants at this year's Payments Conference discussed how evolving technology and emerging payment products both challenge and complement legacy payments while providing opportunities for nonbank firms to compete against and collaborate with traditional payment providers - like large financial institutions and card networks. Moreover, given the flurry of recent...

Virtually all developed countries face projected budget shortfalls for their public pension programs. The shortfalls arise for two reasons. First, populations in developed countries are aging rapidly. Second, until recently older individuals in developed countries have been retiring earlier. These two developments have created serious strains on public pension programs....

Health care reform has been the primary focus of policymakers for much of the past year, culminating with the Patient Protection and Affordable Care Act that was signed into law by President Obama on March 23, 2010. The vigorous national debate on the act has highlighted the importance of innovative,...

Gibbons and Katz's (1991) asymmetric information model of the labor market predicts wage losses following displacement should be larger for layoffs than for plant closings. This was borne out in their empirical work. In this paper, the authors examine how the difference in wage losses across plant closing and layoff...

In certain situations, Americans who become chronically ill have to pay higher rates to continue their health insurance coverage. Indeed, although the majority of Americans are insured, hardly anyone is fully protected against the risk that their next insurance policy will cost considerably more than their current one. Although illness...

Two-sided market theory predicts that platforms may subsidize the participation of one type of agent by extracting surplus from another type to internalize indirect network externalities. However, few empirical studies exist to evaluate the impact of government intervention in these markets. The authors use confidential bank-level data to study the...

The financial crisis that started in 2007 exposed a number of flaws in the financial system. Many of these flaws were associated with financial instruments that were issued by the shadow banking system, especially securitized assets. The volume and complexity of securitized assets grew rapidly during run-up to the financial...

The authors explore the effects of mandatory third-party review of mortgage contracts on the terms, availability, and performance of mortgage credit. This paper is based on a legislative experiment in which the State of Illinois required "High-risk" mortgage applicants acquiring or refinancing properties in 10 specific zip codes to submit...

This paper explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches. The new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large US military contractors. This strategy is used to estimate the dynamic...

This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, the authors estimate the effects of relationship banking on the customers'...

Much concern has recently been expressed that both large, procyclical changes in bank assets and ?credit crunches? caused by bank reluctance to expand loans during recessions contribute to economic instability. These effects are difficult to explain using the standard textbook model of deposit expansion in which deposits are constrained only...

This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, the authors estimate the effects of relationship banking on the customers'...

Congress has recently passed a financial reform bill. Many of the components of that bill center on the issues discussed in this paper. Importantly, the legislation leaves many of the details to be worked out by the regulatory authorities. One of the key components of an orderly resolution process is...

Gibbons and Katz's (1991) asymmetric information model of the labor market predicts wage losses following displacement should be larger for layoffs than for plant closings. This was borne out in their empirical work. In this paper, the authors examine how the difference in wage losses across plant closing and layoff...

This chapter discusses identification of common selection models of the labor market. The authors start with the classic Roy model and show how it can be identified with exclusion restrictions. The authors then extend the argument to the generalized Roy model, treatment effect models, duration models, search models, and dynamic...

The 2010 Summer Workshop on Money, Banking, Payments and Finance met at the Federal Reserve Bank of Chicago this summer, for the second year. The following document summarizes and ties together the papers presented. The annual Summer Workshop on Money, Banking, Payments and Finance met again in August 2010. The...

Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans (interest only, negative amortization and teaser mortgages) enable households to postpone loan repayment compared to traditional mortgages and hence relax borrowing constraints. At the...

Virtually all developed countries face projected budget shortfalls for their public pension programs. The shortfalls arise for two reasons. First, populations in developed countries are aging rapidly. Second, until recently older individuals in developed countries have been retiring earlier. These two developments have created serious strains on public pension programs....

The authors analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example refers to consumers who transfer the entire balance from an existing credit card account to a new account, but use the new card for convenience transactions,...

The growth of securitization made it easier for banks to sell home mortgage loans that they originated. The author explores how mortgage sales affected banks in the years leading up to the financial crisis that began in 2007 and how their pre-crisis mortgage sales affected banks during the crisis. Loan...

The authors' study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, they employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, they find that...

The financial crisis that started in 2007 exposed a number of flaws in the financial system. Many of these flaws were associated with financial instruments that were issued by the shadow banking system, especially securitized assets. The volume and complexity of securitized assets grew rapidly during run-up to the financial...

The authors explore the effects of mandatory third-party review of mortgage contracts on the terms, availability, and performance of mortgage credit. This paper is based on a legislative experiment in which the State of Illinois required "High-risk" mortgage applicants acquiring or refinancing properties in 10 specific zip codes to submit...

This paper explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches. The new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large US military contractors. This strategy is used to estimate the dynamic...

Two-sided market theory predicts that platforms may subsidize the participation of one type of agent by extracting surplus from another type to internalize indirect network externalities. However, few empirical studies exist to evaluate the impact of government intervention in these markets. The authors use confidential bank-level data to study the...

Health care reform has been the primary focus of policymakers for much of the past year, culminating with the Patient Protection and Affordable Care Act that was signed into law by President Obama on March 23, 2010. The vigorous national debate on the act has highlighted the importance of innovative,...

In certain situations, Americans who become chronically ill have to pay higher rates to continue their health insurance coverage. Indeed, although the majority of Americans are insured, hardly anyone is fully protected against the risk that their next insurance policy will cost considerably more than their current one. Although illness...

The participants at this year's Payments Conference discussed how evolving technology and emerging payment products both challenge and complement legacy payments while providing opportunities for nonbank firms to compete against and collaborate with traditional payment providers - like large financial institutions and card networks. Moreover, given the flurry of recent...

The financial labor supply accelerator links hours worked to minimum down payments for durable goods purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household...

During the recent financial crisis, the Federal Reserve implemented a series of extraordinary and unconventional policies to alleviate the impact of the crisis on financial markets and the economy. In this paper, the authors examine the effects of these policies on broad financial market conditions, explicitly taking into account that...

The recent run-ups in oil and other commodity prices and their implications for inflation and monetary policy have grabbed the attention of many commentators in the media. Clearly, higher prices of food and energy end up in the broadest measures of consumer price inflation, such as the Consumer Price Index....

Much concern has recently been expressed that both large, procyclical changes in bank assets and ?credit crunches? caused by bank reluctance to expand loans during recessions contribute to economic instability. These effects are difficult to explain using the standard textbook model of deposit expansion in which deposits are constrained only...

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